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Indian Hotels: A forgettable year

Jun 6, 2014

The Indian Hotels Company Limited (IHCL) has announced its results for the quarter ended March 2014 and the full year FY14. On a standalone basis, the company has reported 3.9% YoY increase in net sales and loss of Rs 3,655 m at the bottomline. Here is our analysis of the results.

Performance summary

Operating margins fell 3.6% YoY. This was due to higher 'other expenses' which increased by 17.8% YoY. The big jump in this cost head was due to significant investments that the company made in marketing efforts.

The company has made significant diminution to the carrying values of major investments made in Orient-Express Hotels, BJets IHMS, etc. The total amount of this extraordinary write-off was Rs 4,325 m.

Due to the exceptional expense, the company reported a loss of Rs 3,655 m at the standalone bottomline.

The board did not recommend any dividend this year considering the poor financial performance.

(Rs m)

4QFY13

4QFY14

Change

FY13

FY14

Change

Net sales

5,558

5,777

3.9%

37,434

40,662

8.6%

Expenditure

3,890

4,252

9.3%

32,057

35,066

9.4%

Operating profit (EBDITA)

1,668

1,525

-8.6%

5,376

5,596

4.1%

Operating profit margin (%)

30.0%

26.4%

14.4%

13.8%

Other income

96

36

-62.3%

602

598

-0.7%

Interest (net)

268

232

-13.5%

1,707

1,685

-1.3%

Depreciation

315

320

1.7%

2,884

3,081

6.8%

Exceptional Item

(4,247)

(4,325)

NA

(4,304)

(5,548)

NA

Profit before tax

(3,065)

(3,315)

NA

(2,918)

(4,122)

NA

Tax

324

339

4.9%

990

1,110

12.1%

Profit after tax/(loss)

(3,389)

(3,655)

NA

(3,908)

(5,231)

NA

Minority interest

-

-

14

(133)

NA

Share of profit of associates

-

-

(409)

(175)

NA

PAT after minority and sh. of assoc. profit

(3,389)

(3,655)

NA

(4,302)

(5,539)

NA

Net profit margin (%)

-61.0%

-63.3%

-11.5%

-13.6%

No. of shares (m)

807.5

Diluted earnings per share (Rs)

(6.9)

P/E ratio (x)*

(14.0)

(* On a trailing 12 months basis)

What has driven performance in 4QFY14?

IHCL's standalone revenue for 4QFY14 increased by 3.9% YoY. Room revenues remained subdued for the full year in FY14. Due to the economic downturn and the oversupply in key metros, the occupancy rates (OR) as well as average room rates (ARR) have remained muted in FY14.

Cost break-up

Standalone Results

Consolidated Results

As a % of sales

4QFY13

4QFY14

FY13

FY14

Cost of goods

7.9%

8.6%

10.2%

10.5%

Staff costs

22.3%

21.4%

34.0%

33.7%

License fees

6.3%

6.5%

5.3%

5.1%

Power, fuel & light

6.9%

7.0%

7.7%

7.7%

Other Expenditure

26.5%

27.0%

28.5%

29.2%

IHCL's operating profit decreased by 8.6% YoY. The operating performance in the quarter was impacted by significant marketing and branding initiatives that the company launched at the start of 2014.

The bottomline was severely impacted by the mark down in the investments that the company has made. However the management has clarified that the diminution in investments related to Orient-Express Hotels, BJets IHMS, etc has been completed. At the consolidated level, the company recorded a loss of Rs 5,539 m.

What to expect?

Going forward the company's standalone operating performance is expected to stabilse. Without the impact of write-offs in FY15, the company's domestic business should return to profitability. Its international operations are also showing signs of improvement. The peak supply situation in the Indian market as well as the company's peak capex is now behind us. Indian Hotels at the standalone level will show an improved performance. However, at the consolidated level, it will still be a difficult few years for the company's international operations.

We had recommended that investors Sell the stock and book profits in our note on 17 April 2014 as the stock had breached our target price of Rs 75. We recommend that investors do not buy the stock at current levels.

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